Peter Gossas was no stranger to action plans and change programs when, in 2003, he was named president of Sandvik Materials Technology, a leading producer of advanced alloys and ceramic materials. SMT supplies customers in a broad range of industries with products and systems solutions.

Gossas, 57, had spent his entire career in the steel sector. Over decades of chronic industry restructuring, he became convinced that companies will survive and prosper in the long term only through constant operational improvement. He had also learned that in most organizations, the potential for excellence is far greater than managers think. At age 28, as production head of a melt shop threatened with closure, Gossas had been stunned by the energy and creativity unleashed—and the results achieved—when everybody in the shop, from managers to furnace operators, worked together as a team to improve efficiency and ensure survival.

At Sandvik Materials Technology, Gossas faced a very different challenge: an 8,000-plus entity composed of some 50 production units and more than 30 sales units spread across the globe. Although SMT’s financial performance was not on par with those of Sandvik Tooling and Sandvik Mining and Construction—Sandvik’s other two business areas—it was still making decent profits. What’s more, it excelled at product development and was a world leader in many of its niches. Gossas describes the challenge with a metaphor: “How can one awaken a sleeping giant with untapped potential, make it a little leaner and hungrier, and make it realize that, even if some units are doing well, it could do a lot better? It is like awakening a fat cat sleeping in the sun.”

That quest turned into a full transformation at SMT, starting with lean manufacturing and continuing with sales and marketing, purchasing, and product development. After an initial three-year phase, which achieved its financial goals of doubling both SMT’s earnings before interest and taxes (EBIT) and its return on capital employed (ROCE), it has entered a second three-year phase focusing on growth.

In an interview conducted at SMT headquarters, near Stockholm, Gossas spoke with Johan Ahlberg and Tomas Nauclér, a director and a principal, respectively, in McKinsey’s Stockholm office, about the challenge of mobilizing every individual in a relatively profitable and well-performing organization to embark on the path of broad, deep, and never-ending change.

The Quarterly: What was the starting point for the journey toward a full business transformation at Sandvik Materials Technology?

Peter Gossas: When I came to SMT, some of our units were making a good profit, and SMT as a whole had never, to my knowledge, lost money, although it was not fully achieving what our owners were asking for. Under those circumstances, a full transformation was not on my mind. We started off by using ordinary rationalization tools such as simply reducing manpower, which usually stimulates creativity and gets the organization interested in finding more efficient ways of working.

I had believed that this would lead to a good increase in productivity, but the result was actually that productivity fell slightly. When we analyzed the result, we discovered that because the organization had been largely unchanged for many, many years, an informal structure of key operators, unbeknownst to management, had been keeping the wheels turning. When we reduced staff levels, this informal organization lost steam. Clearly, we had to try something else.

The Quarterly: What did you do then?

Peter Gossas: We began with a diagnostic. I’ve always believed that by taking a one-hour walk through a company’s manufacturing and other departments and asking some questions along the way, one can get a good idea of how it is performing. So that’s what we did. We walked through, unit by unit, and evaluated strengths as well as gaps between where we were and where we should be. The main findings were that product development was good, capital efficiency appeared weak, and there was strong potential in developing productivity in manufacturing. In fact, we concluded that SMT’s long history of unbroken profit was primarily owed to product development and renewal, and this in turn had resulted in a relatively low push to develop efficiency in other areas.

So we started the transformation program by putting the spotlight on manufacturing, and there we defined production lead time as the first area in which we needed to develop our competence. This was because lead time is at the core of productivity. To cut lead time, you need a very good material flow, machine utilization, and quality control.

The Quarterly: Did you at this point develop a detailed plan for the transformation of SMT?

Peter Gossas: No, there was and is no grand plan, and there has been no “big-bang” launch of what we are doing. Action plans driven by top management may work well in tight organizations with a few huge production units where you can simply recruit and put in place managers with the necessary skills, but SMT is a very different animal. Because we are specialists in different families of materials, production is spread over some 50 specialized units and sales in more than 30. Changing the management of even half of these units is out of the question, because too much competence would be lost.

This means that change must be driven by developing competence within the organization, by managers and workers in each unit creating and taking ownership of their change programs because they are motivated by pride in improving their professionalism and achieving better results. The question was how we could trigger that development. We have proceeded step by step, with one thing leading to the next. We began with manufacturing, and it was through that change process that we realized there was a similarly huge potential in developing more efficient ways of marketing and selling our products. The third area that we spotlighted was purchasing, which was decentralized in the extreme, so we weren’t getting the prices that our scale warranted.

The fourth leg is to leverage the new ways of working in all these areas to drive product development in a more efficient way. We are seeing opportunities in creating links between our people in R&D, sales, purchasing, manufacturing, and with our customers. This will make it possible to speed up product development through the parallel development of the properties of a new product, the choice of raw materials that go into it, and the best way to manufacture it and introduce it on the market. This used to be done in consecutive steps.

The Quarterly: What are the main goals of the overall transformation program?

Peter Gossas: At the end of the day, we are measured on our financial performance. Our goals were to double EBIT and ROCE in three years, and we achieved those targets. We are now ready to look at growth as a key target while continuing to improve productivity. To my mind, you cannot grow yourself into higher profits unless you have the platform of a really good business, and it would have been impossible or very risky to go for growth back in 2003. However, while the financials are absolutely essential because they are the final result, I firmly believe that the main factor affecting these results in the long term is the way people in an organization develop their ways of working.

So what’s most interesting to us is the way we work, and this idea is at the core of what we call the SMT Business System, which is a fancy name for something very simple—namely, the processes for seeking ways of working that can be defined as excellent or, in other words, the continual development, by every single unit, of the very best practices in all areas. We have come some way, but we are not ready, and we never will be. That’s in the nature of things. I get really nervous if managers say that their units have been very good at something for some time and are working in exactly the same way today. It’s a recipe for disaster.

The Quarterly: To what extent do you draw inspiration from other companies that have gone down this path?

Peter Gossas: We are stealing as much as we can from various companies. Toyota’s success, for instance, is well known. But I must say that while one can steal step one and get a first-step effect, it is extremely important for an organization to take full ownership and develop its own model. The more people who are involved in this development, the more it will become an SMT model, and that’s what it has to be, because we have our own history, our own product range. So creating a new business system at SMT requires getting the buy-in from managers of some 80 production and sales units and over 8,000 employees. That’s the big challenge.

The Quarterly: Mobilizing an organization to improve its performance when it is already good is notoriously difficult. What has been your experience?

Peter Gossas: When a unit is in full crisis and has, say, eight months to get its act together or face closure, the manager does not have to sell the idea of change. But you won’t get automatic buy-in for a new business system in a company where many units view themselves as good—some even as very good. In that situation, the manager’s message must be different from the one about survival being at stake, but it needs to be just as persuasive because a new system will not work unless everybody believes in it and is dedicated to it.

Too many organizations launch change programs and action plans that disappear after a while but have had, it’s hoped, some impact on behavior, though one cannot be sure. So the first challenge for us was to ensure that every employee understands that this business system is not an action plan; it’s a religion that is about what should characterize a really good company, and there are no alternatives to this religion. We have put a lot of effort into making everybody understand this.

The Quarterly: What role does the top-management team play in this endeavor?

Peter Gossas: The top team—and there are only six of us, so it’s a very small management team—must be ambassadors of change. We have spent an amazing number of hours traveling and meeting people in the organization, just to be ambassadors, really. I think we have met some 5,000 employees so far, and we have penciled in more meetings this autumn. But while communication is extremely important, it must be reinforced by other tools that get the units into the groove of actually developing their own way of working. To that end, we have given each unit full responsibility to determine ways to improve its productivity, and it is also fully accountable for its financial results. Central management, on the other hand, is responsible for the SMT Business System as such and for providing the toolbox and support that units may need in order to develop their operations. Today we can offer the services of some 50 internal change leaders and technical experts—navigators, as we call them.

The Quarterly: Is it possible to undertake a business transformation without replacing many managers?

Peter Gossas: We have certainly made changes, but I must say I was positively surprised by how many managers successfully made the transition, even among those who still had question marks over their heads, say, one year into the program. It is important to have patience, not least in order to preserve capabilities that are specific to SMT.

The Quarterly: Can you as president act as a role model for change?

Peter Gossas: The management of a unit has a process to determine what should be done to achieve positive change. But the plan is no good unless the workers buy in. If there’s a problem, it can be helpful if I come to the work floor, step up on a crate so that everybody can see me, and have a discussion with a shift unit that may be negative about change. By describing what our successful units have achieved, I can get many people interested and curious about our new ways of working. It’s basically a question of communication and discussion. I have the advantage that I’ve spent many years in the steel business, so it is easy for me to discuss different issues with different people. In fact, it’s hard for me to walk into a melt shop and not begin discussing ways to solve operational problems. The most effective role models, however, are our showcase units.

The Quarterly: Why are showcase units so effective?

Peter Gossas: Some of our manufacturing and sales units achieved improvements early on that were greater than they had thought possible. We encourage people from these units to visit others, where employees are skeptical about the new business system, often because they have seen change programs come and go in the past without leaving much of a mark. When such visitors describe their successful experiences, while acknowledging that they too used to be skeptical, you really have a winning situation.

Even so, we still had some units with strong results whose people were saying, “OK, Peter, the program seems to be good for those with weak results, but we are doing quite nicely, so isn’t it better that we continue as before?” My answer is basically, “If you’re that good, it’s fantastic, but it makes it even more important that you be at the center of influencing the new business system. We can’t afford to have you on the sidelines.”

The Quarterly: We’ve talked about a range of tools to drive change: communication, role modeling, ownership, and accountability. What role does performance management play?

Peter Gossas: An extremely important one. We have monthly performance reviews in which the leaders of product areas, which are clusters of SMT units, describe the operational progress each of their units has made or not made, measured by selected KPIs,¹ such as delivery reliability, lead time, and quality. In addition, in parallel with the quarterly financial results, we ask managers of units to audit their own performance and describe where they are today compared with where they will need to be in order to become excellence-driven units. This hammers home the point that to achieve the required results, they must develop their ways of working. The monthly performance reviews and the quarterly self-audits are just as important as financial results.

The Quarterly: Have the tone and the demands that are made in your performance reviews become tougher with the introduction of the new business system?

Peter Gossas: The tone was always frank, but expectations are now higher. We celebrate success in public, but unsatisfactory results are noted too. Based on selected KPIs, we publish directional arrows for how each unit has developed compared with where it was before, and this has been a very good tool. We publish the results on the company’s intranet, which is read by everyone in the organization, and no unit wants its name alongside a red arrow pointing south. In this way, we visualize the development of the different units for all employees, and we show that it is not acceptable to have a negative development. We try to have a very open climate in the organization, and I know that the publishing of these arrows has started an open and constructive discussion in the different units.

The depth of change at SMT can also be seen at another level: in the daily performance discussions between shift leader and workers. These brief reviews not only raise new production issues but make sure that action points agreed to yesterday have already been taken care of.

The Quarterly: How many years of change can an organization endure? SMT is into its second three-year phase. Can you keep up momentum?

Peter Gossas: My own view is that two years is the limit if you are driving a change program based on an action plan defined by the top-management team. However, if you can get to a situation where each unit is designing action plans for developing its way of working in order to be competitive in a constantly changing business environment, then it is not an action plan but rather a continual process based on a mind-set that will in time, we hope, be at the core of the company’s culture.

The Quarterly: Looking back at these three years, what are you most pleased with, and what big challenges remain?

Peter Gossas: What is really encouraging is that we have reached a stage, in three years, where it looks like we have a better acceptance of, and more interest in, this way of working than I had thought possible. Actually, the bottleneck is not really a lack of interest but that our change leaders and experts—the navigators—have difficulty keeping pace with requests for help from the units. We are now introducing complementary ways to transfer knowledge between units. Management rotation is one way, and we’re very excited about it.

But we cannot afford to rest on our laurels. The challenge is to keep up momentum. The day our fourth-quarter 2005 results were published coincided with us reaching our three-year financial targets, so we arranged a photograph of the management team standing on top of a pile of gravel. But when we looked at the photo, we thought, “Yes, success should be celebrated, but, hey, this is the wrong message.” So we added five bigger piles to symbolize mountains we have yet to climb.

The Quarterly: Is the culture of continual change now ingrained at SMT?

Peter Gossas: It is beginning to take root, but there is no finish line on this path. We are nowhere near the hardwired culture that Toyota has in place. If I were to change the spotlight and start putting forward action plans driven by top management, 80 percent of what we have gained could be lost—perhaps not overnight, but extremely fast.